Guide 01
How carbon markets work, compliance and voluntary
There are two very different things people call a carbon market. One is run by governments and is mandatory. The other is voluntary, much smaller and far less regulated. Knowing which one you are dealing with answers most questions.
- By
- Vida Carbon Guide editorial team
- Updated
- Reading
- 5 min
When people talk about "the carbon market" they usually mean one of two systems that share a vocabulary and very little else. The first is the compliance market: rules written by governments that force certain companies to pay for their emissions. The second is the voluntary market, where companies and individuals choose to buy credits from projects that claim to cut or remove greenhouse gases. They run on different rules and serve different buyers, and their prices can differ by a factor of ten or more.
Compliance markets: a cap and a permit to emit
Most compliance markets use cap-and-trade. A government sets a ceiling on the total emissions allowed from a group of sectors, such as power plants, heavy industry and sometimes aviation or shipping. It then creates allowances, each permitting one tonne of carbon dioxide or its equivalent, up to that cap. Covered companies have to hand in one allowance for every tonne they emit.
Some allowances are given away free, often to industries that compete with foreign producers. The rest are auctioned. Companies that cut emissions cheaply can sell spare allowances to companies that find it harder. The cap shrinks over time, so allowances get scarcer and, in theory, pricier, which keeps pushing emissions down.
Well-known examples include:
- The European Union Emissions Trading System, running since 2005 and the largest by value.
- The UK Emissions Trading Scheme, which replaced UK participation in the EU system in 2021.
- California's program, linked with Quebec's. State lawmakers extended it through 2045 in 2025 and renamed it "cap-and-invest."
- The Regional Greenhouse Gas Initiative, a cap on power plant emissions shared by a group of northeastern US states.
- China's national system, which began trading in 2021 with the power sector and has started adding heavy industry.
A carbon tax is a different tool. It fixes the price and lets the quantity of emissions float, while cap-and-trade fixes the quantity and lets the price float. Some countries use both.
Compliance allowances are created by law, tracked in government registries and traded on regulated exchanges. Prices are public. EU allowances, for example, have spent most of the past few years somewhere between about €60 and €100 a tonne, with sharp swings when policy or the economy shifts.
Where offsets fit into compliance systems
Some compliance programs let companies cover a small share of their obligation with offset credits from approved projects instead of allowances. California allows a limited percentage, and only from project types that its air regulator has written protocols for. The EU system stopped accepting international offsets after 2020.
The Paris Agreement adds another layer. Article 6 lets countries trade emission cuts with each other. Under Article 6.2, countries make bilateral deals. Under Article 6.4, a UN-supervised mechanism issues credits from approved projects; the first credits under that mechanism were approved in early 2026. When a country sells a cut abroad under these rules it is expected to make a "corresponding adjustment," meaning it adds the tonnes back to its own books so that both countries cannot count the same cut.
International aviation has its own scheme, CORSIA, under which airlines offset part of their emissions growth with credits from programs that the UN aviation agency has accepted.
The voluntary market: credits nobody is forced to buy
The voluntary carbon market works without a cap. Projects that say they avoid or remove emissions apply to a private standard, such as Verra, Gold Standard, ACR or Climate Action Reserve. If the project follows an approved method and passes an independent audit, the standard's registry issues credits, one per tonne, each with a serial number.
Buyers are mostly companies with climate targets, and some individuals. They buy credits and retire them, which means canceling them on the registry so they cannot be resold or claimed twice. Retirement is the whole point. A credit that sits in an account unretired has done nothing for the buyer's footprint.
The voluntary market is much smaller than the compliance markets in money terms, and quality is uneven. Credits come from very different activities:
| Kind of credit | Example activities | What it claims |
|---|---|---|
| Avoidance or reduction | Protecting forest that would have been cut, cleaner cookstoves, capturing landfill methane | Emissions that would have happened did not |
| Removal, nature-based | Planting trees, restoring mangroves, storing carbon in soil | Carbon taken out of the air and stored in living systems |
| Removal, engineered | Biochar, direct air capture with storage, enhanced rock weathering | Carbon taken out of the air and stored for a long time |
Prices follow that spread. Old credits from project types that many buyers now avoid can trade for under a dollar. Common nature and household-energy credits often sell for single or low double digits per tonne. Durable engineered removals cost far more, often hundreds of dollars a tonne.
Why the two markets get confused
Both use the word "credit." Both quote prices per tonne. Both have registries. Sellers of voluntary credits sometimes borrow the credibility of compliance markets by saying things like "carbon is the new oil" or "companies are required to buy these." For most voluntary credits, nobody is required to buy them.
That confusion is the root of a long-running scam, where ordinary people are sold voluntary credits as if they were a regulated commodity that will rise in value. Our scams guide covers it in detail.
Who oversees what
Compliance markets have government regulators and, usually, financial market rules. The voluntary market has a patchwork:
- Standards and registries write the project rules and issue credits.
- Accredited auditors, called validation and verification bodies, check projects.
- The Integrity Council for the Voluntary Carbon Market sets a benchmark for quality, the Core Carbon Principles, and labels credits that meet it.
- The Voluntary Carbon Markets Integrity Initiative publishes guidance on what claims buyers can make.
- Government agencies step in on fraud, market manipulation and misleading advertising. In the US that includes the CFTC, the SEC and the Federal Trade Commission.
What this means for you
If a product is labeled carbon neutral, or an airline offers to offset your flight, you are in the voluntary market. The useful questions are about the credit behind the claim: which registry, what project, which year, and whether it was retired. Our guide to judging credit quality walks through them, and the checklist on the homepage turns them into a quick verdict.
If you run a small business, compliance markets probably don't apply to you directly, though your energy bills may already carry some carbon cost where electricity generators pay for allowances. Measuring your own emissions comes before buying anything. Our guide to a first emissions inventory shows how.
Questions readers ask
Can an individual buy into a compliance carbon market?
In some systems a private person can technically open an account and buy allowances, but the markets exist to make polluters pay for emissions, not to serve consumers. Most people meet carbon markets through the voluntary side: an offset at checkout, or a product sold as carbon neutral.
Are voluntary carbon credits regulated?
Only in patches. The standards that issue credits are private organizations. Market regulators such as the US Commodity Futures Trading Commission can act against fraud and manipulation, and advertising rules cover green claims, but there is no single regulator that checks every credit.
Independent educational guide, relaunched in 2026. Not affiliated with Vida Carbon Corp, Vida Energy or any carbon-credit seller. Nothing here is investment advice.